Outsourced Manufacturing and Trade Secrets: Security Procedures for Access, Storage, and Transmission (Part 12)

Businessman hand typing on laptop with reports and graphs concept around

Licensing of Trade Secrets and IP

The licensing of the company’s trade secrets and other IP should be consistent with the company’s identification of its trade secrets and other IP and appropriately limited in scope. Among other considerations, the license should be:

  • Narrowly tailored to cover only the manufacturer’s required use of the licensed information and IP. 
  • Revocable and subject to immediate termination when appropriate.
  • Sublicensable and assignable only to the extent necessary under the arrangement.

Finally, we turn to other important clauses and considerations when setting up an outsourced manufacturing arrangement.

In addition to practical and contractual protections specific to trade secrets, the company should address the following considerations in its outsourced manufacturing agreement to help reinforce the manufacturer’s confidentiality obligations and protect the company:

  • Providing for a limited initial term.
  • Making renewal terms at the company’s discretion.
  • Seeking a right to terminate for convenience.
  • Addressing transition services after the agreement.
  • Including adequate trademark protection.
  • Requiring non-compete covenants.
  • Including assignment and change-of-control restrictions.
  • Specifying means for dispute resolution.

Term and Termination

The company should keep the initial term of the agreement relatively short. In addition, the company should consider including either or both of the following:

  • Renewal terms at the company’s discretion.
  • A termination for convenience provision.

Due to the overhead required for the manufacturer to start the services, the manufacturer may not agree to short terms with unilateral renewal rights or the right for the company to terminate for any or no reason. If so, the company may wish to focus on more readily exercisable breach and termination triggers with relatively short cure periods. These features should create strong incentives for the manufacturer to comply with the agreement’s confidentiality provisions. For example, the company could include:

  • A termination trigger if the company establishes its own facilities.
  • An option for the company to acquire the manufacturer’s designated facilities.

Related articles: 

Outsourced Manufacturing and Trade Secrets: An Economic Overview

Outsourced Manufacturing and Trade Secrets: Outsourced Manufacturing

Outsourced Manufacturing and Trade Secrets: Risks & Benefits

Outsourced Manufacturing and Trade Secrets: Internal Controls

Outsourced Manufacturing and Trade Secrets: Due Diligence

Outsourced Manufacturing and Trade Secrets: Transaction Structure & Contract

Outsourced Manufacturing and Trade Secrets: Manufacturing Process & Personnel 

Outsourced Manufacturing and Trade Secrets: Controlling the Manufacturing Process

Outsourced Manufacturing and Trade Secrets: Contractual Trade Secret Protection Measures

Outsourced Manufacturing and Trade Secrets: The Manufacturer Relationship

Outsourced Manufacturing and Trade Secrets: Obligations Concerning Manufacturer’s Employees and Contractors

David L. Cohen

David L. Cohen, P.C. – Kidon IP
123 West 93rd Street
New York, NY 10025
dlc@davidlcohenpc.com 
(914) 357-5196